A Pick-Me-Up for German Pharma

The Bayer-Schering combo will be big enough to take on the giants of the global drug industry. The new entity is sure to have a richer pipeline

It promised to be a lengthy takeover tussle between two of Germany's leading drugmakers. But two weeks after launching its $17.4 billion hostile bid for Schering (SHR), drug and chemical giant Merck (MRK) threw in the towel.

Merck might have persevered if not for the emergence of a rival with deeper pockets. On Mar. 24, Berlin-based Schering accepted a $19.6 billion cash offer from compatriot Bayer (BAY). The deal unites Schering, the world's largest maker of birth control pills, with Bayer, one of the country's last remaining pharmaceutical and chemical conglomerates.

With combined health-care sales of $18 billion a year, the new company, Bayer-Schering Pharmaceuticals, will be Germany's largest drugmaker. The goal, according to Bayer Management Board Chairman Werner Wenning, is to create "a health-care heavyweight of international standing."


At the very least, the merger should restore some luster to Germany's pharma sector. It was Bayer, after all, that invented the modern drug industry, with its discovery of aspirin more than a century ago. But after sitting on the sidelines during the last two decades of consolidation, Germany's once-thriving drugmakers have been overshadowed by behemoths such as Pfizer (PFE), Britain's GlaxoSmithKline (GSK), and Switzerland's Novartis (NVS).

Bayer has also suffered in recent years. In 2001 it was forced to pull from the market its cholesterol-lowering drug Baycol, which has been linked to more than 100 deaths. With growth stalling, Wenning embarked on an aggressive restructuring program in 2002. He cut costs and spun off a good chunk of the company's chemical assets into a separate company, Lanxess, last year.

Although earnings have improved, Bayer's drug business is, like Schering's, too small to compete against the massive financial and marketing muscle of the global giants. By sales, Bayer is currently ranked the 15th drugmaker worldwide, while Schering is 20th. Bayer has three main areas of business: prescription drugs and consumer health care, agrochemicals, and a chemicals and plastics division called Bayer Material Science.


Prescription drugs, along with over-the-counter standbys such as Alka-Seltzer and One-A-Day vitamins, now account for 36% of annual revenues, which were about $30.5 billion last year. With the acquisition of Schering, Bayer will bolt to the No. 12 spot in the world. "It will significantly improve Bayer's strength and global reach," says Sven Dopke, an analyst with M.M. Warburg in Hamburg.

Together, the new companies will focus on cancer, cardiovascular disease, and a handful of other specialized therapeutic markets. Schering brings Yasmin, the world's top-selling contraceptive, and Betaseron, a treatment for multiple sclerosis, which is expected to pull in $1 billion in annual sales.

Wenning hopes to use Schering's specialist sales force in the U.S. to market its own potential blockbuster, Nexavar, which the U.S. Food & Drug Administration approved as a treatment for kidney cancer at the end of 2005. The drug is also being tested to treat liver, skin, and lung cancers.


The new entity, which will be headquartered in Berlin, will boast a much richer pipeline, with four drugs filed with the FDA and 19 in late-stage testing. Bayer also predicts the merger will lead to annual cost savings of $842 million by 2009. The company has estimated that as many as 6,000 jobs are likely to be eliminated.

But if Bayer-Schering is to compete successfully in the big leagues, it will need to do more. To keep its labs churning out promising new compounds, the new company will need to hike spending on research and development as well as acquire promising new compounds from biotech outfits.

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